Alloy Steel Inc. (fka AYSI)

[natstocks]

I did ask and receive a reply from Sam about this back in Feb 2017. I was curious why the acquisition did not result in any new asset coming onto the balance sheet.

He said:

In effect when we acquired Matrix we bought an intangible asset, namely the earning potential in certain supply arrangements. Past US accounting rules would have shown the price paid as a form of goodwill on the consolidated balance sheet. Current US accounting practise (as stipulated by our US auditors who reviewed the quarterly results release) requires the price paid to be deducted from retained earning upon consolidation. As too why this should be so, you would need to pose your question to someone who has a better understanding than we do of the logic behind this US accounting standards.

Now I just found this note from the 2017 annual results:

(Note 1): During the financial year the Company acquired Matrix Metals International Pty Ltd, a commonly controlled entity. This transaction was accounted for using the ‘pooling of interest’ method. As no tangible assets or liabilities were acquired in the transaction, the entire balance of the transaction has been disclosed directly against retained earnings.

So they used the "pooling of interest" method. I never heard of this, but here's a little I can find from this article:

The use of the [pooling of interest] method peaked during 1998, when it comprised 52 percent of all deal volume. In dollar terms, this equaled $852 billion. Large technology companies used the pooling of interests method, because they were able to avoid recording the related acquisition costs. It also made earnings look stronger, because no write-downs for goodwill were required under the method.

The pooling of interests method was discontinued in the U.S. in 2001 as part of the accounting industry’s general shift to fair value accounting.

Purchase price accounting had existed as an alternative to the pooling of interests method, but the new Standard 141 on business combinations superseded prior FASB rulings on business combinations. This was later superseded by Accounting Standards Codification Topic 805, FASB’s most current position on business combinations, which offers even more detailed guidance on the use of fair value in financial reporting requirements.

And then I found more nuance on the supposed "discontinuation" of this as a method from ey.com. I guess it still can be used for "common control" situations:

Statement 141, Business Combinations, eliminated the application of pooling-of-interest method for business combinations, except as it related to common control transactions.

The biggest issue I see is this: do they have more companies that they will acquire from themselves in the future?